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TMI Blog2024 (6) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... curred. 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 volun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and subsequent remittances to the shareholders of FPS on account of dividend payments, buy-back etc. 5. Consequently, on 21.04.2023, the petitioner received a communication from FPS stating that as a one-time measure, FPS had decided to grant the option holders a payment of USD 43.67 per option as compensation towards loss in the value of the options and it was based on the number of options held by the petitioner as on 23.12.2022. Furthermore, it was also stated that the FPS would be withholding tax on the said compensation. 6. Subsequently, on 29.04.2023, the petitioner preferred an application under Section 197 of the Act seeking a Nil declaration certificate on the deduction of TDS by FPS. On 23.05.2023, the petitioner preferred a revised application under Section 197 of the Act. 7. Thereafter, on 15.07.2023, the Revenue passed the impugned order rejecting the petitioner s application on the score that the amount received would be in the nature of perquisite under Section 17 (2) (vi) of the Act. 8. Aggrieved thereby, the petitioner has invoked the writ jurisdiction of this Court to ventilate his grievance. 9. Mr. Tarun Gulati, learned Senior Counsel, appearing on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd perused the record. 13. The short controversy that emerges for resolution in the present case is whether the one-time payment made on behalf of FPS formed a part of salary under Section 17 of the Act or not? The consequential question of taxability of such payment is contingent upon the aforesaid issue and shall be answered as a corollary of the same. 14. For the sake of convenience, the relevant extracts of the order impugned before us are reproduced herein for reference:- After perusal of the facts of the case and the written submissions of the Assessee, following observations are made. 1. The assessee has contended that the amount receivable by him for FPS does not constitute income u/s 2 (24) of the Income Tax Act, 1961. In this regard, it is observed that section 2 (24) of the Act provides an inclusive definition of Income and it is not an exhaustive definition. Thus even if a nature of receipt is not specifically mentioned under this section, it may still be includible in the taxable income of the assessee, depending upon the facts of the case. 1. General rule is that every amount received by an assessee is taxable unless it is specifically exempt under any provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s equivalent to the fair market value less the exercise price of the shares so allotted under section 17 (2) (vi) and is taxable under the head Salaries in hands of the employee or ex-employee, as the case may be. Consequently, the compensation receivable on the said ESOPs, even though from a former employer, directly or indirectly, on account of diminution of fair value of the underlying shares, should also have the same characterization and tax treatment and hence, in my view, is taxable under the head Salaries . It also does not matter whether the said amount is being paid by the former employer directly to the assessee or through any of its group companies indirectly and the amounts would remain taxable as salary. Further, this amount would have been taxable as salary if the assessee would have been in current employment with the payer or its group companies and hence, the amounts would remain taxable as salary even if the assessee is no longer employed with the payer or its group companies. Having come to the conclusion that the compensation should be chargeable to tax under the head Salaries , provisions of section 192 of the Act would apply and accordingly, the employer is u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the right of holding the stocks under his name had not been exercised. Therefore, the moot question is only limited to the extent whether the one-time voluntary payment made on behalf of FPS to the petitioner can be pegged as perquisite under Section 17 (2) (vi) of the Act. 18. It is germane to point out that the perquisites, as defined in Section 17(2) of the Act, constitute a list of benefits or advantages, which are made taxable and are incidental to employment and received in excess of salary. Furthermore, as per Section 17 (2) (vi) of the Act, perquisite refers to 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 petitioner. The explanation appended to Section 17 (2) (vi) of the Act also clarifies that the value of any specified security shall be the difference in the amount of fair market value of the specified security on the date on which the option was exercised and the actual amount paid by the petitioner. For the sake of convenience, Section 17 (2) (vi) of the Act and the explanation thereto is reproduced herein for reference:- 17. Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able only as indicating the matters that have to be taken into account in reaching a conclusion. 15. In Rai Bahadur Jairam Valji [AIR 1959 SC 291 : (1959) 35 ITR 148] it was observed thus: (AIR pp. 292-93, para 2) 2. The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. [ Vide Van Den Berghs Ltd. (Inspector of Taxes) v. Clark [1935 AC 431 : (1935) 3 ITR (Eng Cas) 17 (HL)].] That, however, is not to say that the question is one of fact, for, as observed in Davies (Inspector of Taxes) v. Shell Co. of China Ltd. [(1951) 32 TC 133 : (1952) 22 ITR Supp 1 (CA)] : these questions between capital and income, trading profit or no trading profit, are questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onary. It cannot be got over by saying that after the order is passed the assessee gets a right. That has nothing to do in determining the question. 16. In S.R.Y. Sivaram Prasad Bahadur [(1971) 3 SCC 726, 732 : (1971) 82 ITR 527, 535] in no uncertain terms it was laid down that it is the quality of the payment that is decisive of the character of the payment and not the method of payment or its measure which will make it fall within the category of capital or revenue. Undoubtedly, the High Court had not kept these important aspects before rendering the decision whether it is a revenue receipt or not. The judgment of the High Court requires to be interfered with. *** 27. Therefore, in this case, the maintenance allowance was qualified by the statute and it was a nomenclature peculiarly suited to payments of the nature of income. The learned counsel for the Revenue would state if the payments in this case do not constitute windfall and the right to payment of these cash allowances in the case on hand, could be enforced in a civil court, as laid down in this ruling, there is no other way than to hold this to be an income. But, as we have pointed out just now, maintenance allowance is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts and, therefore, are not income within the meaning of Section 2(24) of the Income Tax Act. Accordingly, we set aside the judgment of the High Court and allow the appeals with no order as to costs. 21. It is also significant to place reliance on the decision of the Supreme Court in the case of Godrej and Company (supra) , wherein, one-time payment was given to an assessee company in lieu of a change in contractual terms between the assessee company and the management company. In the light of such facts, such monetary receipts were also clubbed under the head of capital receipt and not under the revenue receipts and thus, not liable to tax. The relevant paragraph no. 8 of the said decision is reproduced herein for reference:- 8. This sum of Rs 7,50,000 has undoubtedly not been paid as compensation for the termination or cancellation of an ordinary business contract which is a part of the stock-in-trade of the assessee and cannot, therefore, be regarded as income, as the amounts received by the assessee in CIT and Excess Profits Tax v. South India Pictures Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent agreed to continue to serve with the extent of his field of activity limited to the State of Hyderabad only. To regard such an agreement as a mere variation in the terms of remuneration is only to take a superficial view of the matter and to ignore the effect of such variation on what has been called the profit-making apparatus. A managing agency yielding a remuneration calculated at the rate of 20 per cent of the profits is not the same thing as a managing agency yielding a remuneration calculated at 10 per cent of the profits. There is a distinct deterioration in the character and quality of the managing agency viewed as a profit-making apparatus and this deterioration is of an enduring kind. The reduced remuneration having been separately provided, the sum of Rs 7,50,000 must be regarded as having been paid as compensation for this injury to or deterioration of the managing agency just as the amounts paid in Glenboig case [(1922) 12 TC 427] or Vazir Sultan case [ Civil Appeal No. 346 of 1957, decided on March 20, 1959;(1959) 36 ITR 175] were held to be. This is also very nearly covered by the majority decision of the English House of Lords in Hunter v. Dewhurst [(1932) 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts which were before the AO should be kept in mind while deciding the present controversy. However, a bare perusal of the application dated 29.04.2023 made by the petitioner under Section 197 of the Act, which has been appended in the petition as Annexure-P4, would reveal that the petitioner had duly placed the pertinent details alluding to FSOP. 23. Furthermore, the record available before us would reflect that the AO had never enquired or asked for clarification from the petitioner regarding any other significant details pertaining to FSOP. In addition thereto, the reliance placed by the Revenue in the case of National Petroleum Construction Co (supra) is also misplaced as in that case, the issue pertained to the determination of permanent establishment in Section 197 proceedings. However, in the present case, the relevant facts pertaining to the ESOP and details alluding to one-time voluntary payment made by FPS to the petitioner were placed on the desk of the concerned AO, while making an application under Section 197 of the Act. 24. Interestingly, the reasoning appended in the impugned order also hinges upon the fact that since FPS intended to deduct tax before making t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of loom hours must be held to be of capital nature. But this argument suffers from a double fallacy. 5. In the first place it is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. It was felicitously pointed out by Macnaghten, J., in Racecourse Betting Control Board v. Wild [22 TC 182 : (1938) 4 All ER 487] that a payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa . Therefore, the decision in Maheshwari Devi Jute Mills case [AIR 1965 SC 1974 : (1965) 3 SCR 765 : (1965) 57 ITR 36] cannot be regarded as an authority for the proposition that payment made by an assessee for purchase of loom hours would be capital expenditure. Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant facto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dear All, As you are aware, the Board of Directors (BoD) of Flipkart Private Limited, publicly announced the complete separation of PhonePe business, by selling off its entire shareholding, in Dec 2022. With this announcement, the value of ESOPs granted to all stakeholders (including present and former employees in our subsidiaries in India, Israel, US, Singapore, Saudi Arabia, Egypt, UAE, China etc.) will drop, along with loss of opportunity to share in future accretion in the value of Phonepe shares. While there is no legal or contractual right under FSOP 2012, to provide compensation for loss in current value or any potential losses on account of future accretion to our ESOP holders, the BoD on its own discretion, has decided to pay US$43.67 as compensation for each ESOP subject to applicable withholding taxes and other tax rules in respective countries of various ESOP holders 27. Therefore, it is 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 thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X
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