What the courts have decided on section 17(2)(iiia), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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Additional Commissioner of Income Tax v Bharat V. Patel
Supreme CourtHelps taxpayerSuperseded by amendment
The Assessing Officer wants to tax what my client received on redemption of stock appreciation rights granted by the foreign parent as a perquisite. Is there Supreme Court authority on this?
There is, but read the year carefully. For a redemption before 1 April 2000 the Supreme Court held the amount was not taxable: it fell within clause (iiia) of s.17(2), which was inserted by the Finance Act 1999 with effect from 1 April 2000 and was not retrospective, and it could not be forced into s.17(2)(iii) or s.28(iv). The Court held that a receipt must be made taxable before it can be treated as income.
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Ravi Kumar Sinha v Commissioner of Income Tax
High CourtHelps taxpayer
I got shares under my employer's stock purchase scheme but they were locked in and I could not sell them. Can the department tax me on the difference between the stock exchange price and what I paid?
No. The Delhi High Court held that where the shares carry a lock-in and cannot be traded or sold, the fair market value cannot be taken above the face value, so on these facts the determinative figure was Rs 15 per share. The quoted stock exchange price was irrelevant because the shares could not be sold in the open market. The valuation report the employer had obtained from its accountants, putting the value at Rs 22.50, was at best a means for the employer to gauge its withholding obligations and could not fix fair market value for the employee. The assessee's appeal was allowed and the Tribunal's order set aside.
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CIT v Biocon Ltd
High CourtHelps taxpayer
My company issued shares to employees under an ESOP at below market price. Can we deduct the discount, even though no cash went out?
Yes, on this decision. The Karnataka High Court held that the discount on issue of shares under an employees stock option plan - the difference between the market price on the date of grant and the offer price - is allowable under section 37(1). Section 37(1) permits deduction of expenditure laid out or expended and does not require a payout, nor does it envisage expenditure in cash; expenditure includes a loss. Because the options vest at 25 per cent a year, the liability arises in the accounting year and only its quantification is deferred, so it is an ascertained and not a contingent liability. The Revenue's appeal was dismissed.
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NXP India Pvt Ltd v DCIT — the Dispute Resolution Panel's theory that the employee is charged at VESTING, so the employer's stock compensation cost must be disallowed for non-deduction, did not survive; but the Tribunal's own reasoning will not bear weight
ITATHelps taxpayerNo later treatment found
The Dispute Resolution Panel says that because ESOP expenditure is allowable to the employer at vesting, the perquisite must be taxable in the employee's hands at vesting too, and has disallowed our stock compensation cost because we deducted only on exercise. Is there authority on that?
There is one order on stage one — the perquisite that arises on employee share benefits — and it went against the Panel, but a practitioner should read it with care. It concerns the Panel's argument that the employee's charge follows the employer's deduction to the vesting date. The Bangalore Tribunal allowed the assessee's ground and deleted the disallowance of Rs 65,23,426 of stock compensation expense. Its stated reason, however, rests on the Supreme Court's decision in CIT v. Infosys Technologies Ltd., which construed the law as it stood before 1 April 2000, and the concluding paragraph contradicts itself on whether that decision applies. The value of the order is that the Panel's vesting theory did not prevail; its reasoning is not a foundation for advice.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.
