2024 (6) TMI 78 - HC - Income Tax

Salary Perquisite u/s 17(2)(vi) - one-time payment made on behalf of FPS formed a part of salary - as per revenue payment received was linked to ESOPs as a form of compensation for diminution of the fair market value of stock - HELD THAT - A literal understanding of the provision would provide that the value of specified securities or sweat equity shares is dependent upon the exercise of option by the petitioner. Therefore, for an income to be included in the inclusive definition of perquisite , it is essential that it is generated from the exercise of options, by the employee. The facts of the present case suggest that the petitioner has not exercised his options under the FSOP till date. The stock options were merely held by the petitioner and the same have not been exercised till date and thus, they do not constitute income chargeable to tax in the hands of the petitioner as none of the contingencies specified in Section 17 (2) (vi) of the Act have occurred. The compensation was a voluntary payment and not transfer by way of any obligation. Notably, the present is not a case where the option holder has exercised his right. Rather, the facts suggest that the petitioner has not exercised his options under the FSOP till date. As due to the disinvestment of the PhonePe business from FPS, the Board of Directors of FPS had decided to provide a one-time voluntary payment to all the option holders pursuant to FSOP. It is imperative to point out that the management proceeded by noting that there was no legal or contractual right under FSOP to provide compensation for loss in current value or any potential losses on account of future accretion to the ESOP holders. As elementary to highlight that the payment in question was not linked to the employment or business of the petitioner, rather it was a one-time voluntary payment to all the option holders of FSOP, pursuant to the disinvestment of PhonePe business from FPS. In the present case, even though the right to exercise an option was available to the petitioner, the amount received by him did not arise out of any transfer of stock options by the employer. Rather, it was a one-time voluntary payment not arising out of any statutory or contractual obligation. Thus, the reasoning appended to the impugned order, holding that the amount in question tantamount to perquisite u/s 17 (2) (vi) of the Act, cannot be countenanced in law, as the stock options were not exercised by the petitioner and the amount in question was one-time voluntary payment made by FPS to all option holders in lieu of disinvestment of PhonePe business. We set aside the impugned order - We, however, note that since the transaction already took place on 31.07.2023, we, accordingly, accord liberty to the petitioner to file an application for refund of TDS amount before the Revenue. It is further directed to the Revenue to consider the application of the petitioner in view of the observations made hereinabove and as per extant regulations.

Summary

Issues Involved:
1. Whether the one-time payment made by FPS is a part of salary under Section 17 of the Income Tax Act, 1961.
2. The taxability of such payment.
3. The characterization of the payment as perquisite under Section 17(2)(vi) of the Act.
4. The relevance of the petitioner not exercising stock options.
5. The voluntary nature of the payment.

Summary:

Issue 1: Whether the one-time payment made by FPS is a part of salary under Section 17 of the Income Tax Act, 1961.

The petitioner challenged the order dated 15.07.2023 passed u/s 197 of the Income Tax Act, 1961, which rejected the petitioner's application for a 'Nil' deduction at source certificate. The Revenue characterized the one-time payment made by FPS as a perquisite under Section 17(2)(vi) of the Act, arguing it was linked to ESOPs as compensation for diminution in stock value.

Issue 2: The taxability of such payment.

The petitioner argued that the payment was not linked to employment and thus could not be taxed under Section 15 of the Act. The petitioner contended that ESOPs are taxable only when exercised or sold, neither of which had occurred. The Revenue opposed, stating the transaction had already taken place and the AO was not obligated to determine if the stock option was exercised.

Issue 3: The characterization of the payment as perquisite under Section 17(2)(vi) of the Act.

The court noted that perquisites under Section 17(2) are benefits incidental to employment. The Revenue's order stated the payment was linked to ESOPs and thus taxable as a perquisite. However, the court found that the petitioner had not exercised his stock options, which is crucial for the payment to be considered a perquisite.

Issue 4: The relevance of the petitioner not exercising stock options.

The court emphasized that for a payment to be included as a perquisite u/s 17(2)(vi), the stock options must be exercised. Since the petitioner had not exercised his options, the payment could not be considered income chargeable to tax.

Issue 5: The voluntary nature of the payment.

The court highlighted that the payment was a one-time voluntary payment by FPS, not linked to any statutory or contractual obligation. The payment was made at the discretion of FPS due to the disinvestment of PhonePe, not as a result of employment.

Conclusion:

The court set aside the impugned order dated 15.07.2023, concluding that the payment in question was not a perquisite under Section 17(2)(vi) of the Act, as the stock options were not exercised and the payment was voluntary. The petitioner was granted liberty to file an application for a refund of the TDS amount, which the Revenue should consider in light of the court's observations. The writ petition was allowed and disposed of accordingly.