The company bought back my vested options before I exercised them. Salary or capital gains?
Capital gains, on this order, and on a fact that does real work. The shares of the Singapore parent were not listed, so the assessee could never exercise his options. Section 17(2)(vi) charges the value of a specified security allotted or transferred to the employee and values it on the date the option is exercised; with no exercise and no allotment there was no specified security and no way to value one, so the salary charge failed. The vested option was itself a capital asset - a right to subscribe to shares - and its repurchase was a relinquishment, so the consideration fell under s.45. The Tribunal said in terms that this leaves the ordinary case alone: exercise the option and the perquisite charge applies as usual.
Decided by the ITAT (ITAT Bangalore Bench 'B' - Sandeep Singh Karhail (Judicial Member) and Balakrishnan S. (Accountant Member)) on 2026-07-30, reported as ITA No. 3034/Bang/2025; [2026] 189 taxmann.com 66 (Bang.)(Trib.); 2026 SCC OnLine ITAT 13430. It bears on section 17(2)(vi), section 2(14), section 2(42A), section 2(47), section 45, section 192 of the Income Tax Act 1961, in Salary & Perquisites and Capital Gains matters.
The rate difference is the whole point: perquisite means slab rates and withholding under s.192, capital gains means the s.45 computation and, on the assessee's case here, a long-term rate. It also gives the practitioner the structural argument - no exercise, no specified security - in a Tribunal order rather than only in the High Court writ decisions on nil-withholding certificates.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee was an employee of Flipkart Internet Private Limited, an Indian company which is indirectly a wholly owned subsidiary of Flipkart Private Limited, Singapore. The Singapore parent had granted him 40,536 options under the Flipkart Stock Option Scheme, 2012. Its shares were not listed on any recognised stock exchange, so the vested options could never be exercised. In the previous year relevant to assessment year 2020-21 the parent repurchased 2,653 of the vested options for Rs. 2,33,80,616, under letters of offer for repurchase dated 18 August 2019 and 18 September 2019. The assessee returned gross salary of Rs. 1,90,27,343 and long-term capital gains of Rs. 2,43,54,073. In a reassessment made under s.147 read with s.144B by order of 3 March 2025, the Assessing Officer treated the repurchase consideration as a salary perquisite under s.17(2)(vi), relying on Form 16, in which the employer had shown it as a perquisite with tax deducted, and on the letters of offer, which had said the repurchase would be taxable as salary. The Commissioner (Appeals) confirmed the assessment.
The appeal was allowed and the repurchase consideration held taxable as capital gains and not as a perquisite. Because the options were never exercised - and, the parent's shares being unlisted, could not be exercised - no 'specified security' within s.17(2)(vi) ever came into existence, no value could be assigned to it, and the charge under salaries failed for want of a computation mechanism. A vested option is a capital asset, being a right to subscribe to the shares at a future date; its repurchase against consideration is a relinquishment and so a transfer under s.2(47), and the gain falls under s.45 as the assessee had returned it. The Tribunal set an express limit on that: stock options can still be taxed as a perquisite under s.17(2)(vi) where they are exercised, and the later sale of shares allotted on exercise is taxable under s.45. The ground challenging the validity of the reassessment was left open, relief having been given on the merits; the interest ground was consequential and the penalty ground premature.
The Tribunal worked through the five stages of an option - grant, vesting, exercise, allotment and sale - and the case turned on which stage was reached. Under the scheme a vested option gave a right but not an obligation to purchase or subscribe at a predetermined price at a future date, and because the parent's shares were not listed on any recognised stock exchange the assessee could never exercise. On the salary side, s.17(2)(vi) charges the value of a specified security allotted or transferred to the employee free of cost or at a concessional rate; the Explanations define a specified security as the security offered under the plan and value it at its fair market value on the date the option is exercised, less what the employee paid. The option itself is therefore not the specified security, and the valuation Explanation is the computation mechanism: until a specified security comes into existence on exercise, no value can be assigned, and on the principle that a charging section and its computation provisions are an integrated code, the charge under salaries does not operate. On the capital gains side the Tribunal relied on s.2(14) and on clause (e) of Explanation 1 to s.2(42A), which treats a right to subscribe to a financial asset as a capital asset, and on the Supreme Court in Miss Dhun Dadabhoy Kapadia and the jurisdictional Karnataka High Court in Chittharanjan A. Dasannacharya, which held stock options and the right to purchase the underlying shares to be capital assets. The repurchase of the vested options against consideration was a relinquishment and so a transfer under s.2(47). The employer's treatment of the amount in Form 16, and its deduction of tax at source, were not treated as deciding the head of income. The Madras High Court decision in Nishithkumar Mukeshkumar Mehta was distinguished on the facts: the taxpayer there retained all his stock options after receiving the payment, which was compensation on the divestment of the PhonePe business, whereas here the options were bought back against consideration and extinguished.
Accordingly, since in the present case, the stock options granted to the assessee under FSOP 2012 were never exercised, and no shares were ever allotted to the assessee under the Flipkart Stock Option Scheme, 2012, we are of the considered view that "specified security" within the meaning of provisions of section 17(2)(vi) of the Act did not come into existence, and therefore, no value can be assigned to it.
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Handle my notice → Ask a CA on WhatsAppCapital gains, on this order, and on a fact that does real work. The shares of the Singapore parent were not listed, so the assessee could never exercise his options. Section 17(2)(vi) charges the value of a specified security allotted or transferred to the employee and values it on the date the option is exercised; with no exercise and no allotment there was no specified security and no way to value one, so the salary charge failed. The vested option was itself a capital asset - a right to subscribe to shares - and its repurchase was a relinquishment, so the consideration fell under s.45. The Tribunal said in terms that this leaves the ordinary case alone: exercise the option and the perquisite charge applies as usual. This was decided by the ITAT (ITAT Bangalore Bench 'B' - Sandeep Singh Karhail (Judicial Member) and Balakrishnan S. (Accountant Member)) and bears on section 17(2)(vi), section 2(14), section 2(42A), section 2(47), section 45, section 192 of the Income Tax Act 1961. It is reported as ITA No. 3034/Bang/2025; [2026] 189 taxmann.com 66 (Bang.)(Trib.); 2026 SCC OnLine ITAT 13430. The rate difference is the whole point: perquisite means slab rates and withholding under s.192, capital gains means the s.45 computation and, on the assessee's case here, a long-term rate. It also gives the practitioner the structural argument - no exercise, no specified security - in a Tribunal order rather than only in the High Court writ decisions on nil-withholding certificates. If it applies to you, the first step is this: Pin down whether the option was ever exercised and whether any share was allotted; the characterisation turns on that and nothing else.
The assessee was an employee of Flipkart Internet Private Limited, an Indian company which is indirectly a wholly owned subsidiary of Flipkart Private Limited, Singapore. The Singapore parent had granted him 40,536 options under the Flipkart Stock Option Scheme, 2012. Its shares were not listed on any recognised stock exchange, so the vested options could never be exercised. In the previous year relevant to assessment year 2020-21 the parent repurchased 2,653 of the vested options for Rs. 2,33,80,616, under letters of offer for repurchase dated 18 August 2019 and 18 September 2019. The assessee returned gross salary of Rs. 1,90,27,343 and long-term capital gains of Rs. 2,43,54,073. In a reassessment made under s.147 read with s.144B by order of 3 March 2025, the Assessing Officer treated the repurchase consideration as a salary perquisite under s.17(2)(vi), relying on Form 16, in which the employer had shown it as a perquisite with tax deducted, and on the letters of offer, which had said the repurchase would be taxable as salary. The Commissioner (Appeals) confirmed the assessment. The matter was decided on 2026-07-30 by the ITAT (ITAT Bangalore Bench 'B' - Sandeep Singh Karhail (Judicial Member) and Balakrishnan S. (Accountant Member)). On those facts the ITAT held as follows. The appeal was allowed and the repurchase consideration held taxable as capital gains and not as a perquisite. Because the options were never exercised - and, the parent's shares being unlisted, could not be exercised - no 'specified security' within s.17(2)(vi) ever came into existence, no value could be assigned to it, and the charge under salaries failed for want of a computation mechanism. A vested option is a capital asset, being a right to subscribe to the shares at a future date; its repurchase against consideration is a relinquishment and so a transfer under s.2(47), and the gain falls under s.45 as the assessee had returned it. The Tribunal set an express limit on that: stock options can still be taxed as a perquisite under s.17(2)(vi) where they are exercised, and the later sale of shares allotted on exercise is taxable under s.45. The ground challenging the validity of the reassessment was left open, relief having been given on the merits; the interest ground was consequential and the penalty ground premature.
The Tribunal worked through the five stages of an option - grant, vesting, exercise, allotment and sale - and the case turned on which stage was reached. Under the scheme a vested option gave a right but not an obligation to purchase or subscribe at a predetermined price at a future date, and because the parent's shares were not listed on any recognised stock exchange the assessee could never exercise. On the salary side, s.17(2)(vi) charges the value of a specified security allotted or transferred to the employee free of cost or at a concessional rate; the Explanations define a specified security as the security offered under the plan and value it at its fair market value on the date the option is exercised, less what the employee paid. The option itself is therefore not the specified security, and the valuation Explanation is the computation mechanism: until a specified security comes into existence on exercise, no value can be assigned, and on the principle that a charging section and its computation provisions are an integrated code, the charge under salaries does not operate. On the capital gains side the Tribunal relied on s.2(14) and on clause (e) of Explanation 1 to s.2(42A), which treats a right to subscribe to a financial asset as a capital asset, and on the Supreme Court in Miss Dhun Dadabhoy Kapadia and the jurisdictional Karnataka High Court in Chittharanjan A. Dasannacharya, which held stock options and the right to purchase the underlying shares to be capital assets. The repurchase of the vested options against consideration was a relinquishment and so a transfer under s.2(47). The employer's treatment of the amount in Form 16, and its deduction of tax at source, were not treated as deciding the head of income. The Madras High Court decision in Nishithkumar Mukeshkumar Mehta was distinguished on the facts: the taxpayer there retained all his stock options after receiving the payment, which was compensation on the divestment of the PhonePe business, whereas here the options were bought back against consideration and extinguished. In the words reproduced by the source cited on this page: "Accordingly, since in the present case, the stock options granted to the assessee under FSOP 2012 were never exercised, and no shares were ever allotted to the assessee under the Flipkart Stock Option Scheme, 2012, we are of the considered view that "specified security" within the meaning of provisions of section 17(2)(vi) of the Act did not come into existence, and therefore, no value can be assigned to it."
It was decided by the ITAT on 2026-07-30 and is reported as ITA No. 3034/Bang/2025; [2026] 189 taxmann.com 66 (Bang.)(Trib.); 2026 SCC OnLine ITAT 13430. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 17(2)(vi), section 2(14), section 2(42A), section 2(47), section 45, section 192, 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 appeal was allowed and the repurchase consideration held taxable as capital gains and not as a perquisite. Because the options were never exercised - and, the parent's shares being unlisted, could not be exercised - no 'specified security' within s.17(2)(vi) ever came into existence, no value could be assigned to it, and the charge under salaries failed for want of a computation mechanism. A vested option is a capital asset, being a right to subscribe to the shares at a future date; its repurchase against consideration is a relinquishment and so a transfer under s.2(47), and the gain falls under s.45 as the assessee had returned it. The Tribunal set an express limit on that: stock options can still be taxed as a perquisite under s.17(2)(vi) where they are exercised, and the later sale of shares allotted on exercise is taxable under s.45. The ground challenging the validity of the reassessment was left open, relief having been given on the merits; the interest ground was consequential and the penalty ground premature. It arises in Salary & Perquisites and Capital Gains matters, on section 17(2)(vi), section 2(14), section 2(42A), section 2(47), section 45, section 192 of the Income Tax Act 1961, and was decided by ITAT Bangalore Bench 'B' - Sandeep Singh Karhail (Judicial Member) and Balakrishnan S. (Accountant Member). 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. Record whether exercise was even possible - here the parent's shares were unlisted, so no specified security could ever come into existence, and that fact shapes the case. Compute the holding period from grant or vesting on the plan documents before claiming a long-term rate; the order does not deal with it. Expect the officer to reopen or reassess on the footing that the receipt is a perquisite under s.17(2)(vi), as happened here. Keep the buy-back offer letter and the plan rules, which show what was bought back and from whom - and do not be put off by the employer's Form 16 treatment, which was not treated as deciding the head.
Validity check could not be completed. The order is about a month old and nothing cites it: a citation search returns only copies of the document itself and one commentary article, and there is no later-treatment banner and no note of an appeal. What can now be said is where it sits. The decisions usually put alongside it - Sanjay Baweja (Delhi), Nishithkumar Mukeshkumar Mehta (Madras) and Manjeet Singh Chawla (Karnataka) - all concern a different transaction: the one-time voluntary compensatory payment the Singapore parent made when it divested the PhonePe business, to make good the fall in value of options the employees continued to hold. This order is about an actual buy-back of vested options against consideration, extinguishing them, which is why the Tribunal could treat it as a relinquishment and a transfer. It therefore neither follows nor contradicts that line; it sits beside it, and the Tribunal said as much in distinguishing the Madras decision. Two cautions travel with that. Manjeet Singh Chawla v. Dy. CIT (TDS) [2025] 175 taxmann.com 778 (Kar.), decided 2 June 2025 - a decision of the jurisdictional High Court on the same employer's same scheme - is not cited anywhere in this order; neither party appears to have put it, and the Tribunal engages only with the Madras decision. And the ground challenging the validity of the reassessment was left open, so the matter is not concluded even between these parties. That finding was checked against a published source, which is linked on this page, on 2026-08-24. 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 passage quoted is from para 18 of the order; the sentence this entry previously carried was a blog's summary of the holding and not the court's words. Two facts do real work and were not in the earlier account. The shares of the Singapore parent were not listed on any recognised exchange, so the assessee could never exercise the options - the analysis rests on impossibility of exercise, not merely on non-exercise. And the assessment was a reassessment under s.147 read with s.144B, the challenge to which the Tribunal left open because it gave relief on the merits, so the case is not authority on reassessment and that jurisdictional point remains live. The capital asset limb rests on clause (e) of Explanation 1 to s.2(42A) as well as on s.2(14), and on the jurisdictional Karnataka High Court in Chittharanjan A. Dasannacharya, which is the strongest support the order has. CIT v. B.C. Srinivasa Setty is used against the salary charge - no computation mechanism until exercise - and not in support of the capital gains charge. Sanjay Baweja and Akash Poddar appear in the order only in the recital of what the Assessing Officer had rejected; the Tribunal discusses neither. The Madras High Court decision was distinguished on stated facts - the taxpayer there retained all his options and the payment was compensation on the PhonePe divestment - and not on any view that the High Courts are split. The order does not deal with the cost of acquisition of the options or with the holding period, and it does not decide the validity of the reassessment, which it left open. It does not consider the decision of the jurisdictional Karnataka High Court on the same employer's scheme, which was not cited to it, and it says nothing about an employee whose options could have been exercised but were not. 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 appeal was allowed and the repurchase consideration held taxable as capital gains and not as a perquisite. Because the options were never exercised - and, the parent's shares being unlisted, could not be exercised - no 'specified security' within s.17(2)(vi) ever came into existence, no value could be assigned to it, and the charge under salaries failed for want of a computation mechanism. A vested option is a capital asset, being a right to subscribe to the shares at a future date; its repurchase against consideration is a relinquishment and so a transfer under s.2(47), and the gain falls under s.45 as the assessee had returned it. The Tribunal set an express limit on that: stock options can still be taxed as a perquisite under s.17(2)(vi) where they are exercised, and the later sale of shares allotted on exercise is taxable under s.45. The ground challenging the validity of the reassessment was left open, relief having been given on the merits; the interest ground was consequential and the penalty ground premature.
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