Section 17(2)(vi)

Section 17(2)(vi) — the law in short

What the courts have decided on section 17(2)(vi), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Sanjay Baweja v Dy CIT High CourtHelps taxpayerHigh Courts differ
  My employer paid me for the fall in value of options I never exercised. Is that a perquisite?
  No, on this decision. The Delhi High Court held that a one-time voluntary payment made to holders of unexercised stock options after a group disinvestment was not a perquisite under s.17(2)(vi), because the value of specified securities depends on the exercise of the option and no option had been exercised. The refusal of a nil-deduction certificate under s.197 was set aside.
• Rajesh R Hemrajani v ITO ITATHelps taxpayerNo later treatment found
  When I sell ESOP shares, is my cost of acquisition under section 49(2AA) the fair market value used for the perquisite even if that perquisite was never actually taxed in India?
  Yes, on this order. The Mumbai Bench read the words of section 49(2AA) - the fair market value which has been taken into account for the purposes of section 17(2)(vi) - and held that the provision nowhere requires that value to have been subjected to tax in India or included in total income. The assessee, a non-resident working at the UK branch of L&T Infotech, exercised 1,540 options at Re 1 a share when the fair market value was Rs 1,753.58. The Assessing Officer had cut the cost of acquisition down to the exercise price and added Rs 29,59,332. The Tribunal held the fair market value was the cost and allowed the appeal.
• Pramod Kumar Jain v DCIT ITATHelps taxpayerNo later treatment found
  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.
• ELCA Cosmetics Pvt Ltd v DCIT — the RSU cost cross-charged by the overseas group company is an actual cash outflow and is deductible under s.37(1) ITATHelps taxpayer
  My Indian company reimburses its overseas parent for the cost of restricted stock units given to our employees, and we deduct tax on the perquisite in their hands. The Assessing Officer has disallowed the reimbursement as notional and capital. Is it deductible?
  It was held deductible on these facts — and the employees' side of this is stage one, the perquisite that arises when the group company's shares reach them, this entry being about the company's mirror-image deduction for the cost it bears. The Delhi Tribunal held that where the overseas group company grants its stock to the Indian company's employees and recovers the cost from the Indian company, the cost is an actual cash outflow and not notional or contingent, and the compensation paid in the form of employee stock option expenditure is allowable as expenditure incurred wholly and exclusively for the purposes of business. Ground 2 of the appeal was allowed.
• ACIT v Bidhan Chandra Choudhary — the merchant banker's Rule 3(8)(iii) value fixes the sweat equity perquisite, and a foreign investor's DCF price paid a month later cannot be substituted ITATHelps taxpayerNo later treatment found
  My employer valued my unlisted sweat equity shares through a merchant banker, but the Assessing Officer says the company sold shares to a foreign investor a month later at a far higher price and has taxed me on the difference. Can he do that?
  No, on these facts — and this is stage one, the perquisite that arises on exercise under s.17(2)(vi). The Tribunal held that where the shares are unlisted the fair market value is the value determined by the merchant banker under Rule 3(8)(iii), and that a price fixed under the Reserve Bank of India's foreign direct investment pricing guidelines on a discounted free cash flow basis for an issue to a non-resident investor cannot be substituted for it, because the two sets of provisions deal with altogether different situations. The Revenue's appeal against deletion of a perquisite addition of Rs 4,53,18,900 was dismissed.
• ACIT (TDS) v Sula Vineyards Pvt Ltd — for unlisted shares the Rule 3(8) merchant banker value governs the ESOP perquisite, and a genuine sale at a much higher price to an unrelated party does not displace it ITATHelps taxpayerNo later treatment found
  The TDS officer says my employer under-deducted on my ESOP perquisite because the company's shares actually changed hands at Rs 850 while the merchant banker valued them at Rs 194. Which figure fixes the perquisite?
  The merchant banker's figure — and this is stage one, the perquisite on exercise under s.17(2)(vi). The Tribunal held that on a plain reading of Rule 3(8) the fair market value of an unlisted company's shares is the value determined by a merchant banker, so an actual arm's length sale of the same company's shares at Rs 850 during the same year gave the Revenue no basis for recomputing the perquisite. The Revenue's appeal against deletion of a short-deduction demand of Rs 2,62,34,000 was dismissed.
• Unnikrishnan V S v ITO (International Taxation) — an ESOP benefit accrues where the qualifying services were rendered, so a non-resident who was granted options for work done in India is taxed here on exercise ITATHelps departmentNo later treatment found
  My client is a non-resident now. He exercised options granted years ago while he worked in India, and his employer deducted tax. Can he claim the perquisite did not accrue in India, or take treaty protection?
  No, on these facts — and this is stage one, the perquisite on exercise under s.17(2)(vi). The Tribunal held that the benefit accrued and arose in India at the time the options were GRANTED, in consideration of services rendered in India, even though s.17(2)(vi) brings it to tax only in the year of exercise. Article 15 of the India-UAE treaty gave no protection because the employment to which the benefit related was exercised in India, and the taxpayer's own authorities pointed the other way. Both appeals were dismissed.
• 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.
• Bharat Financial Inclusion Ltd v DCIT (TDS) — s.17(2)(vi) fixes only the VALUE of the ESOP perquisite; the s.192 withholding obligation arises when the shares are actually allotted ITATHelps taxpayerNo later treatment found
  My employee exercised his options in one year but the shares were only allotted in the next, after he satisfied conditions in his separation agreement. In which year was I obliged to deduct tax under s.192?
  This is stage one — the perquisite on exercise — and the Tribunal drew a line between valuing it and withholding on it. It held that the amended s.17(2)(vi) is only to determine the VALUE of the ESOP transaction, and that the obligation to withhold under s.192 accrues only when the shares are ALLOTTED after the person who exercised the option has completed his commitments; a mere exercise is only acceptance of a general proposal. The assessee's appeal against a short-deduction order was allowed.
• Statutory position — s.17(2)(vi): stage one of the employee share charge, the perquisite on exercise, and what a "specified security" and a "sweat equity share" are CBDT Circulars & InstructionsCuts both ways
  My employer put a large ESOP figure in my Form 16 in the year I exercised my options, even though I have not sold a single share. On what provision is that being taxed, and how is the amount worked out?
  This is stage one of a two-stage charge. On the day you EXERCISE the option, s.17(2)(vi) makes the difference between the fair market value of the share on that date and the amount you actually paid a perquisite, taxable as salary — whether or not you sell anything, and whether or not you receive any cash. Stage two comes later, on sale, when the difference between the sale price and that same fair market value is a capital gain, with the cost of acquisition fixed by s.49(2AA) at the value already taxed here. The fair market value on the date of exercise is the hinge between the two stages, and it is fixed by Rule 3(8) and Rule 3(9).
• Statutory position — s.192(1C), s.191(2) and s.156(2): the eligible start-up ESOP deferral, its three triggers, the fourteen-day period, and the fact that it defers the employee's own tax too CBDT Circulars & InstructionsCuts both ways
  My client works for a start-up and has exercised his options. He has no cash and the shares cannot be sold. Is there any deferral, and does it cover his own tax or only his employer's TDS?
  This is stage one — the perquisite on exercise — and yes, there is a deferral, but only where the employer is an eligible start-up referred to in s.80-IAC. It covers BOTH sides. Section 192(1C) defers the employer's obligation to deduct or pay tax on the perquisite, and s.191(2) defers the employee's own obligation to pay income-tax on it directly, in identical terms; s.156(2) defers payment of the tax or interest included in a notice of demand on the same income. In every one of the three, the tax must be paid within FOURTEEN DAYS of the EARLIEST of three events: the expiry of forty-eight months from the end of the relevant assessment year; the date of sale of the specified security or sweat equity share; and the date the employee ceases to be the employee. All three sub-sections apply to income of an assessment year beginning on or after 1 April 2021, and all three were inserted by the Finance Act, 2020, which came into force on 1 April 2020.
• Statutory position — s.49(2AA) and s.2(42A) Explanation 1(i)(hb): stage two of the employee share charge, the cost of acquisition on sale and the holding period that runs from allotment CBDT Circulars & InstructionsCuts both ways
  I paid tax on my ESOP perquisite when I exercised. Now I have sold the shares. What is my cost of acquisition, and from what date does my holding period run?
  This is stage two. When you sell, the capital gain is the sale consideration MINUS the fair market value that was already taxed as your perquisite at stage one: s.49(2AA) fixes the cost of acquisition of a specified security or sweat equity share as "the fair market value which has been taken into account" for the purposes of s.17(2)(vi). The amount you actually paid for the shares is NOT your cost — the statute deliberately links the cost to the value already charged to salary, so that the same appreciation is not taxed twice. For the holding period, s.2(42A) Explanation 1(i)(hb) says it is reckoned from the DATE OF ALLOTMENT OR TRANSFER of the specified security or sweat equity shares, not from the date of grant and not from the date of vesting.
• Statutory position — restricted stock units: what s.17(2)(vi), Rule 3(8) and s.2(42A) actually say about them, and the express statement that no authority fixing the charging point at vesting was found CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client is paid partly in restricted stock units of a US parent. Everyone tells me RSUs are taxed on vesting rather than on exercise. Is there authority for that in Indian law?
  None has been found, and this entry — which is about stage one, the perquisite charge — says so expressly rather than reasoning by analogy from options. What the Act does say is this. Stage one, s.17(2)(vi), charges "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee" — words wide enough on their face to catch shares of a foreign parent delivered to an Indian employee without payment. But the VALUATION machinery is written around an option: Explanation (c) values the security "on the date on which the option is exercised by the assessee", Explanation (e) defines "option" as "a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price", and Rule 3(8)(i) and Rule 3(9) both fix the fair market value "on the date on which the option is exercised by the employee". Stage two is clearer: s.49(2AA) makes the cost the value taken into account at stage one, and s.2(42A) Explanation 1(i)(hb) runs the holding period from the date of allotment or transfer.
• Statutory position — Rule 3(8) and Rule 3(9): how the fair market value of an ESOP or sweat equity share is fixed on the date of exercise, including the merchant banker's specified date CBDT Circulars & InstructionsCuts both waysNo later treatment found
  The Assessing Officer says my ESOP perquisite should have been computed on a higher share value than my employer used. What is the prescribed method for fixing the fair market value on the date I exercised?
  This is stage one — the fair market value that fixes the perquisite under s.17(2)(vi) on exercise. For an equity share LISTED on a recognised stock exchange, Rule 3(8)(ii) takes the AVERAGE OF THE OPENING PRICE AND THE CLOSING PRICE of the share on the date of exercise on that exchange; where it is listed on more than one exchange, the exchange with the highest volume of trading in the share; and where there is no trading in the share at all on the date of exercise, the closing price on the recognised stock exchange on the date closest to and immediately preceding the exercise date. For an equity share NOT listed, Rule 3(8)(iii) takes such value as is determined by a merchant banker on the "specified date", and Rule 3(9) applies the same merchant-banker method to a specified security that is not an equity share. The "specified date" is the date of exercise, or any earlier date NOT MORE THAN 180 DAYS BEFORE THE DATE OF EXERCISE — this is the point most often got wrong.

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.