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2024 (8) TMI 516 - HC - Income TaxSeeking certificate of 'nil' deduction of tax at source (TDS) u/s 197 - Compensation received by the petitioner for the diminution in value of ESOPs - capital receipt or a perquisite taxable under the Income-tax Act, 1961 - HELD THAT - In order to determine the value of the perquisite as per clause (vi), one should be in a position to ascertain the benefit that the employee or other person received from the specified security, albeit not by way of capital gains. In order to tax an ESOP as a perquisite, the benefit flowing to the employee from the ESOP should be ascertained. Because shares are offered to employees and other stakeholders under stock option schemes either free of cost or at a concessional rate, the benefit would ordinarily be the difference between the fair market price of the share and the price at which such share is offered to the ESOP holder. Since such monetary benefit would typically be realized, albeit notionally, only at the time of exercise of the option and remains a non-monetizable contractual right until then, the fair market price of the shares as on the date of exercise of option is reckoned and the price paid by the option holder is deducted therefrom to determine the value of the perquisite in the form of ESOP. Explanation (c) to clause (vi), therefore, prescribes that the value of the specified security is the difference between the fair market value of the shares on the date of exercise of the option and the price paid by the option holder. Unusually, in the current case, the assessee received a substantial monetary benefit at the pre-exercise stage by way of discretionary compensation for diminution in value of the Stock Options. I move next to the facts so as to examine whether the value of the perquisite can be determined in these circumstances. From the material on record, it is not possible to discern the exercise price under the FSOP 2012. In any event, this is not material because the petitioner has not exercised the Option in respect of any of the 2137 Vested ESOPs. Effectively, no payments were made by the petitioner under the FSOP 2012 as on the record date. Nonetheless, by qualifying as an Employee under the FSOP 2012, the petitioner received compensation at the rate of USD 43.67 per ESOP on all 5924 ESOPs (both Vested and Unvested) held by him as on the record date. These ESOPs were clearly granted to the petitioner as an Employee under the FSOP 2012. If payments had been made by the petitioner in relation to the ESOPs, it would have been necessary to deduct the value thereof to arrive at the value of the perquisite. Since the petitioner did not make any payment towards the ESOPs and continues to retain all the ESOPs even after the receipt of compensation, the entire receipt qualifies as the perquisite and becomes liable to be taxed under the head salaries . It is unnecessary to consider whether it falls within any other head of income. As a consequence of the conclusion that the compensation qualifies as a perquisite and not a capital receipt, the judgments cited in respect of capital gains, including those relating to the absence of a rate or computation mechanism or provision for tax deduction at source lose relevance. For various reasons set out in this order, I am also unable to endorse the opinion of in Sanjay Baweja 2024 (6) TMI 78 - DELHI HIGH COURT As a corollary to the above conclusions, the petitioner is not entitled to a 'nil' certificate of deduction. In effect, although the basis for the conclusion in the impugned order is flawed, the rejection of the request for a 'nil' certificate of deduction is affirmed.
Issues Involved:
1. Whether the compensation received by the petitioner qualifies as a capital receipt or perquisite. 2. Whether the compensation is taxable under the Income-tax Act, 1961 (I-T Act). 3. Whether the petitioner is entitled to a 'nil' tax deduction certificate under Section 197 of the I-T Act. Issue-Wise Detailed Analysis: 1. Whether the compensation received by the petitioner qualifies as a capital receipt or perquisite: - Petitioner's Argument: The petitioner contended that the compensation received for the diminution in value of ESOPs due to the divestment of the PhonePe business is a capital receipt. The petitioner argued that ESOPs are rights in relation to shares and should be treated as capital assets. Since there was no transfer of these capital assets, the compensation should not be taxable as capital gains. - Respondent's Argument: The respondents argued that the compensation was paid as consideration for the relinquishment of the right to sue for the diminution in value of ESOPs, which qualifies as the transfer of a capital asset. - Court's Analysis: The court examined the nature of ESOPs and concluded that ESOPs are contractual rights to receive shares subject to the terms and conditions of the ESOP scheme. These rights do not qualify as capital assets under Section 2(14) of the I-T Act, as they are not property held by the assessee. The court also noted that the compensation was not paid for the loss or sterilization of a profit-making apparatus but as a discretionary payment for the potential or actual diminution in value of contractual rights. - Conclusion: The court concluded that ESOPs do not fall within the ambit of "property of any kind held by an assessee" in Section 2(14) and are not capital assets. Consequently, the compensation received was not a capital receipt. 2. Whether the compensation is taxable under the Income-tax Act, 1961 (I-T Act): - Petitioner's Argument: The petitioner argued that the compensation received is not taxable as it is a capital receipt and there is no provision under the I-T Act for taxing such receipts. - Respondent's Argument: The respondents contended that the compensation qualifies as a perquisite under Section 17(2) of the I-T Act, which is taxable under the head "salaries." - Court's Analysis: The court referred to Section 17(2) of the I-T Act, which includes the value of any specified security or sweat equity shares allotted or transferred by the employer as a perquisite. The court noted that the compensation was paid to restore the value of the ESOPs and falls within the scope of "specified security." The court also considered the judgment of the Delhi High Court in Sanjay Baweja, which held that such compensation is a capital receipt, but disagreed with this view. - Conclusion: The court concluded that the compensation received by the petitioner qualifies as a perquisite and is taxable under the head "salaries." 3. Whether the petitioner is entitled to a 'nil' tax deduction certificate under Section 197 of the I-T Act: - Petitioner's Argument: The petitioner applied for a 'nil' tax deduction certificate on the basis that the compensation received was a capital receipt and not liable to income-tax. - Respondent's Argument: The respondents argued that the compensation is taxable as a perquisite and, therefore, the petitioner is not entitled to a 'nil' tax deduction certificate. - Court's Analysis: The court examined the provisions of the I-T Act and the nature of the compensation received. Since the compensation was determined to be a perquisite taxable under the head "salaries," the court found that the petitioner is not entitled to a 'nil' tax deduction certificate. - Conclusion: The court affirmed the rejection of the petitioner's request for a 'nil' tax deduction certificate. Final Judgment: The writ petition was disposed of with the conclusion that the compensation received by the petitioner qualifies as a perquisite and is taxable under the head "salaries." Consequently, the petitioner is not entitled to a 'nil' tax deduction certificate. The court's decision was based on the interpretation of the relevant provisions of the I-T Act and the nature of the compensation received. The court also disagreed with the Delhi High Court's judgment in Sanjay Baweja. The writ petition and related miscellaneous petitions were closed with no costs.
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