Section 17(2)

Section 17(2) — the law in short

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

• 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.
• CIT v Infosys Technologies Ltd Supreme CourtHelps taxpayer
  My employees exercised stock options but the shares are locked in and non-transferable. Was I supposed to deduct tax on the market value less what they paid?
  No, on the law as it stood before 1 April 2000. The Supreme Court dismissed the Revenue's appeals and held that the company was not an assessee in default. The shares were locked in for five years, held by the trust, stamped non-transferable and notified as such to the stock exchange, and had to be returned if the employee left. They had no realisable value on the date the option was exercised and there was no cash inflow, so any benefit was notional and its value unascertainable. Section 17(2)(iiia), which supplied the missing valuation mechanism from 1 April 2000, was held not to be clarificatory or retrospective.
• Arun Kumar v Union of India Supreme CourtHelps taxpayerSuperseded by amendment
  The officer has valued my company flat under Rule 3 and added the difference to my salary. I pay the licence fee my employer charges everybody. Must he first prove I actually got a concession in rent?
  On the law as the Supreme Court found it in 2006, yes: 'concession' in s.17(2)(ii) is a jurisdictional fact, and Rule 3 is only a machinery provision that cannot be reached until the officer has first found as a fact that a concession was given. That space was closed almost at once — the Finance Act 2007 inserted the very deeming provision the Court said the Act did not contain, with retrospective effect from 1 April 2002, so from AY 2002-03 a concession is deemed wherever the value computed under Rule 3 exceeds the rent recovered.
• V.M. Salgaocar & Bros P Ltd v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  For old years, was an interest-free loan from my employer taxable as a perquisite?
  No - but only for years before the charge was specifically provided for. The Supreme Court held that granting an interest-free or concessional loan to an employee does not result in a taxable benefit or perquisite 'unless specifically so provided', reading the 1984 insertion and 1985 omission as Parliament declining to tax it.
• CIT v L.W. Russel Supreme CourtHelps taxpayer
  My employer pays part of the premium on a superannuation policy, but I get nothing unless I stay until retirement. Is that contribution taxable as a perquisite in my hands now?
  No, on the scheme as it stood. The Supreme Court held that the employer's contribution was not a perquisite allowed to, or due to, the employee. Until he reached the age of superannuation the money vested in the trustees, and who would benefit depended on which contingency happened: if he left, was dismissed or died in service, he got back only his own share of the premiums, and the employer's share, subject to the trustees' discretion, went back to the employer. The employee had at best a contingent right. A perquisite cannot be allowed to an employee who has no right to it.
• Manjeet Singh Chawla v Dy CIT (TDS) High CourtHelps taxpayerHigh Courts differ
  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.
• All India Central Bank Officers Federation v Union of India High CourtHelps departmentNo later treatment found
  My client is a bank officer taxed on a deemed concession in rent for the bank's quarters even though the market rent is lower than the percentage of salary applied. Is the deeming provision open to challenge?
  Not on the grounds run so far. A Division Bench of the Bombay High Court dismissed a batch of writ petitions by bank officers' associations challenging Explanations 1 to 4 below s.17(2) inserted by the Finance Act 2007 with limited retrospective effect. It held the legal fiction is not an impermissible legislative override of Arun Kumar v Union of India, that the retrospectivity is valid, and that classifying by city population and measuring the concession as a percentage of salary does not offend Article 14.
• 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.
• Nishithkumar Mukeshkumar Mehta v Dy CIT High CourtHelps departmentUnder appeal
  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.
• 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.
• National Federation of Insurance Field Workers of India v Union of India High CourtHelps departmentHigh Courts differ
  LIC has started deducting tax on the conveyance allowance and additional conveyance allowance paid to development officers. Can the employees stop the deduction on the footing that the allowances are exempt under s.10(14)?
  The Orissa High Court said no and dismissed the writ petition. It held that after the 1987 amendment to s.10(14) and the insertion of Rule 2BB, the entire conveyance allowance and additional conveyance allowance are not exempt unless the expenses are actually incurred and that is proved to the satisfaction of the Assessing Officer; the employer remains bound to deduct under s.192, and the employee must establish the exemption in his own assessment.
• Life Insurance Corporation of India v Union of India High CourtHelps taxpayerHigh Courts differ
  Is there any High Court authority the other way on the LIC development officers' conveyance and additional conveyance allowance, and how far does it actually go?
  Yes. The Rajasthan High Court held that development officers of the LIC are entitled to claim exemption under s.10(14) for conveyance allowance and additional conveyance allowance, and directed the Department not to insist on the LIC deducting tax at source on them. But the holding is expressly conditional: it applies only upon the officers satisfying that the allowances were actually spent wholly, necessarily and exclusively in the performance of duties, and the Court twice said the ultimate liability of claiming and proving the exemption is on the employee.
• 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 v Robert Arthur Keltz — where the employee did not render service in India for the whole grant period, only the proportion of the ESOP perquisite relatable to Indian service is taxable in India ITATHelps taxpayerNo later treatment found
  My client came to India part way through the vesting period of his options and exercised them here. The Assessing Officer has taxed the whole perquisite. Can he apportion?
  Yes, on these facts — and this is stage one, the perquisite on exercise. The Delhi Tribunal upheld the Commissioner (Appeals) in holding that because the assessee had not rendered service in India for the whole grant period, only such proportion of the ESOP perquisite as was relatable to the service he rendered in India was taxable in India. The Revenue's appeal was dismissed.
• RBF Rig Corporation LLC v ACIT ITATHelps taxpayer
  My employer pays my Indian tax under a net of tax contract. Must the tax on that tax be grossed up again, or is it exempt under section 10(10CC)?
  It is exempt, so there is only one round of grossing up. The Delhi Special Bench held that tax paid by an employer on an employee's behalf is a perquisite under section 17(2)(iv) - the discharge of an obligation which the employee would otherwise have had to meet - and is not a perquisite provided by way of monetary payment. Section 10(10CC) excludes only monetary payments to the assessee, and a payment to a third party, here the Government, is not one. So the tax borne by the employer is added to salary once, and no further tax on that tax is added. The earlier Delhi Bench decisions in B.J. Services and Western Geo were held to be wrong.
• Statutory position — s.192: the employer deducts at the average rate on his own estimate of the year's salary, and the declarations exist to correct the estimate CBDT Circulars & InstructionsCuts both ways
  I run payroll. Section 192 has no threshold and no percentage in it like every other TDS section does — so how much am I supposed to deduct, and which of my employee's declarations am I actually obliged to act on?
  Section 192 does not work like the rest of Chapter XVII-B: there is no threshold below which you need not deduct and no flat percentage to apply. You deduct, at the time of payment, "at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year" — that is, you build the employee's whole year's salary, work out the tax on it at the slab rates, divide that tax by that salary, and apply the resulting rate to each payment. Everything else in the section exists to make that estimate accurate: sub-section (2) lets the employee bring in salary from another employer in Form 12B, (2A) lets him bring in relief under section 89 in Form 10E, (2B) lets him bring in other income, other tax deducted or collected and a house property loss in Form 12BAA, (2D) obliges you to collect evidence of his claims in Form 12BB, and (2C) obliges you to give him back a statement of his perquisites in Form 12BA. Sub-sections (1A) and (1B) let you choose to pay the tax on a non-monetary perquisite yourself instead of deducting it, and section 115BAC(1A) is the default regime from assessment year 2024-25, so your estimate is made under it unless the employee tells you otherwise. This is the section as it stood after Act No. 15 of 2024 with effect from 1 October 2024; it governs salary paid up to 31 March 2026, after which section 392 of the Income-tax Act, 2025 takes over.
• 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.10(16) and s.10(17A): a scholarship granted to meet the cost of education, and an award or reward in the public interest, and what each of them actually requires CBDT Circulars & InstructionsCuts both ways
  My employer's trust paid my daughter's college fees and called it a scholarship, and separately I received a cash award from a State Government for community work. Is either of these taxable, and does it matter that no approval was mentioned?
  The two clauses ask different questions and only one of them looks for an approval. Clause (16) of section 10 exempts 'scholarships granted to meet the cost of education'. There is no approval requirement in it, no ceiling, no condition about who the grantor is, and no requirement that the whole of the scholarship be spent. What it does require is that the payment be a scholarship and that it be granted to meet the cost of education. Clause (17A) exempts 'any payment made, whether in cash or in kind,— (i) in pursuance of any award instituted in the public interest by the Central Government or any State Government or instituted by any other body and approved by the Central Government in this behalf; or (ii) as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in the public interest'. Approval by the Central Government is required in two places there: for an award instituted by a body other than the Central or a State Government, and for the purposes for which a reward is given by the Central or a State Government.

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.