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Delhi HC Clarifies Tax Treatment of Voluntary ESOP-Related Payments: Disinvestment Compensation Not Salary Perquisite under S. 17


In this case, Sanjay Baweja v. DCIT[i], the Delhi High Court (‘DHC’) addresses the tax implications of a one-time voluntary payment (‘OTVP’) made by Flipkart Pvt. Ltd., Singapore (‘FPS’) to its employees, specifically concerning stock options under the Flipkart Stock Option Plan (‘FSOP’). This case underscores the importance of accurately determining the nature of payments related to Employees Stock Option Plans (‘ESOPs’). It clarifies that voluntary payments not arising from exercised stock options or contractual obligations should not be taxed as perquisites, thus providing more precise guidelines for similar future cases.


  • The petitioner was a former employee of Flipkart Internet Private Limited (‘FIPL’), a wholly-owned subsidiary of Flipkart Marketplace Private Limited (‘FMPL’), a wholly-owned subsidiary of FPS. In 2012, FPS introduced the FSOP, granting stock options to eligible employees of its subsidiaries. The petitioner was granted 1,27,552 stock options from 2014 to 2016, with a vesting schedule of four years.

  • In 2022, FPS announced the disinvestment of its wholly-owned subsidiary, PhonePe. This led to a decrease in the value of FPS stock options and subsequent remittances to FPS shareholders via dividends, buy-backs, etc. In 2023, FPS communicated to the petitioner that it would provide an OTVP of USD 43.67 per option as compensation for the loss in value of the options, based on the number of options held by the petitioner as of 23.12.2022. FPS also indicated that taxes would be withheld on this compensation.

  • Further, in April 2023, the petitioner applied under s. 197 of the Income-tax Act, 1961 (‘IT Act’) for a ‘Nil’ deduction certificate regarding the tax deduction at source (‘TDS’) to be deducted by FPS. However, the Revenue rejected the petitioner’s application, stating that the compensation received would be treated as a perquisite under s. 17(2)(vi) of the IT Act. Aggrieved by the rejection, the petitioner approached the DHC under its writ jurisdiction to address the grievance and challenged the order under s. 197 of the IT Act questioning whether the OTVP constituted part of the salary under s. 17 of the IT Act.

  • The petitioner argued that the Revenue has incorrectly classified the OTVP by FPS as a perquisite, making it taxable under s. 17(2)(vi) of the IT Act. Since ESOPs merely provide a right, not an obligation, to buy shares, representing a right to subscribe to the company’s shares, it is only upon vesting that the option holder gains an unfettered right to exercise the option and receive shares. The petitioner further asserted that ESOPs are taxable in only two situations: when the employee exercises the option or when the employee sells the shares. In this case, the petitioner had not exercised the stock options but only held them. Therefore, the OTVP by FPS was unrelated to the petitioner’s employment with FIPL and could not be classified as salary taxable under s. 15 of the IT Act. Moreover, since the payment does not qualify as a perquisite, the directive for TDS deduction was not legally justified.

  • In response to the petition, the respondent argued that the writ petition (‘WP’) had become infructuous since the transaction occurred on 31.07.2023 and that the proceedings were under s. 197 of the IT Act are administrative, not fact-intensive. The respondent also asserted that the assessing officer (‘AO’) was not required to investigate whether the petitioner exercised the stock option. It also contended that all relevant facts regarding the FSOP were not presented to the authority earlier.


  • The DHC, while allowing the petition, observed that the petitioner had not exercised his stock options under the FSOP, meaning that the stock options remained unexercised. The DHC established that the crucial element for a perquisite under s. 17(2)(vi) of the IT Act is the value of the specified security, which is calculated when the option is exercised. Since the petitioner had not exercised his options, the stock options did not constitute taxable income under s. 17 of the IT Act.

  • The DHC also added that it had been established through many Supreme Court cases, particularly in CIT v. Saurashtra Cement Ltd & Shrimant Padmaraje R. Kadambande[ii], that OTVP be considered as capital receipts and not taxable as revenue receipts.

  • Moreover, the DHC rejected the respondent’s assertion that they lacked sufficient details and observed that the petitioner’s application under s. 197 of the IT Act included all relevant details about the FSOP and noted that the AO did not request further information. Consequently, while allowing the WP, the DHC granted the petitioner liberty to apply for a TDS refund.

Our Analysis

This decision is important because it clarifies the tax treatment of OTVP related to ESOPs. The court established that such payments, if not arising from the exercise of stock options or any contractual obligation, should not be classified as perquisites under s. 17(2)(vi) of the IT Act. This ruling emphasizes that the nature of payment, rather than its categorization by the payer, determines its taxability, providing clearer guidelines for similar future cases and ensuring that voluntary compensations are fairly taxed as salary.

By distinguishing OTVP from employment-linked benefits, the DHC reinforced the principle that not all payments from employers are taxable under salary provisions. It emphasizes the need to evaluate the nature of the receipt rather than its form. It encourages clearer structuring of compensation packages and more precise tax planning for companies and employees dealing with stock options.

End Notes

[i] [2024] 163 116 (Delhi), [30-05-2024].

[ii] (2010) 11 SCC 84

Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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