[2024] 163 taxmann.

com 116 (Delhi)/[2024] 299 Taxman 313 (Delhi)[30-05-2024]

INCOME TAX : Where assessee, ex-employee of FIPL, was granted stock option by
parent company, Flipkart (FPS) and subsequently, assessee received compensation
in lieu of loss in value of stock options due to disinvestment of a wholly owned
subsidiary since stock options were not exercised by assessee and compensation
was not linked to employment, rather it was a onetime voluntary payment to all
option holders of ESOP, amount in question would not tantamount to perquisite
under section 17(2)(vi)

■■■

[2024] 163 taxmann.com 116 (Delhi)

HIGH COURT OF DELHI
Sanjay Baweja
v.
Deputy Commissioner of Income-tax*
YASHWANT VARMA AND PURUSHAINDRA KUMAR KAURAV, JJ.
W.P. (C) NO. 11155 OF 2023
MAY 30, 2024

Section 17, read with section 197, of the Income-tax Act, 1961 - Salaries - Perquisite (Stock
option) - Assessment year 2023-24 - Whether for an income to be included in inclusive
definition of 'perquisite', it is essential that it is generated from exercise of options, by
employee - Held, yes - Assessee, an ex-employee of a company, FIPL which was wholly
owned subsidiary of Flipkart (FPS), was granted certain stock options by FPS under ESOP -
Thereafter, FPS announced disinvestment of its wholly owned subsidiary - Pursuant to said
disinvestment value of stock options fell - Consequently, assessee received compensation
towards loss in value of options - Assessee filed an application under section 197 seeking
'Nil' deduction at source certificate on deduction of TDS on said compensation by FPS -
Assessing Officer rejected said application on ground that amount received was linked to
ESOPs and would be in nature of perquisite under section 17(2)(vi) - It was noted that
assessee had not exercised his vested right with respect to stock option under ESOP -
Whether since stock options were merely held by assessee and same had not been
exercised till date, same would not constitute income chargeable to tax in hands of assessee
as none of contingencies specified in section 17(2)(vi) had occurred - Held, yes - Whether
since payment in question was not linked to employment, rather it was a onetime voluntary
payment to all option holders of ESOP, compensation would not tantamount to perquisite
under section 17(2)(vi) - Held, yes [Paras 25 and 28] [In favour of assessee]
FACTS

■ The assessee was an ex-employee of a company, namely, FIPL a wholly owned subsidiary of
Flipkart(FPS). In 2012, the FPS rolled out an Employee Stock Option Plan (ESOP) called as FSOP,
wherein, the FPS granted certain stock options to the eligible persons, including employees of its
subsidiaries. Thereafter, FPS announced the disinvestment of its wholly-owned subsidiary called PhonePe.
Consequently, the value of the stock options of FPS fell pursuant to the disinvestment and subsequent
remittances to the shareholders of FPS on account of dividend payments, buy-back etc. The assessee
received compensation towards loss in the value of the options and it was based on the number of options
 held by the assessee. Furthermore, it was also stated that the FPS would be withholding tax on the said
compensation.
■ The assessee preferred an application under section 197 and sought for a 'Nil' declaration certificate on the
deduction of TDS by FPS.
■ The Assessing Officer passed the impugned order rejecting the assessee's application on the ground that
the amount received would be in the nature of perquisite under section 17(2)(vi).
■ On writ:
HELD

■ A bare perusal of the impugned order would reveal that the revenue characterized the one-time payment
made by FPS to the assessee under the head of a perquisite, as defined in section 17(2)(vi), on the ground
that the payment received was linked to ESOPs as a form of compensation for diminution of the fair
market value of stocks. [Para 15]
■ As the facts of the matter suggest, undisputedly, the assessee has not exercised his vested right with
respect to stock option under ESOP till date, which signifies that 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 assessee can be pegged as perquisite under section
17(2)(vi). [Para 17]

■ It is germane to point out that the perquisites, as defined in section 17(2), 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), perquisite refers to value of any specified security or sweat equity
former employer, free of cost or at concessional rate to the assessee. The Explanation appended to section
17(2)(vi) 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 assessee. [Para 18]

■ It is also apposite to deal with the contention of the revenue that the facts pertaining to the exercise of the
options held by the assessee were not apprised to the Assessing Officer in the proceedings referable to
section 197. On the said aspect, it was contended that in such a scenario, only the facts which were before
the Assessing Officer should be kept in mind while deciding the present controversy. However, a bare
perusal of the application dated 29-4-2023 made by the assessee under section 197, which has been
appended in the petition, would reveal that the assessee had duly placed the pertinent details alluding to
FSOP. [Para 22]
■ Furthermore, the record available would reflect that the Assessing Officer had never enquired or asked for
clarification from the assessee regarding any other significant details pertaining to ESOP. In addition
thereto, the relevant facts pertaining to the ESOP and details alluding to one-time voluntary payment
made by FPS to the assessee were placed on the desk of the concerned Assessing Officer, while making an
application under section 197. [Para 23]
■ Pertinently, as per section 17(2)(vi), the perquisites include value of any specified security allotted or
transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate
to the assessee. The most crucial ingredient of this inclusive definition is - determinable value of any
specified security received by the employee by way of transfer/allotment, directly or indirectly, by the
employer. As per Explanation (c) to section 17(2)(vi), the value of specified security could only be
calculated once the option is exercised. 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
assessee. 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 assessee has not exercised his options under the ESOP till date. Under the facts of the present
case, the stock options were merely held by the assessee and the same have not been exercised till date
and thus, they do not constitute income chargeable to tax in the hands of the assessee as none of the
contingencies specified in section 17(2)(vi) have occurred. [Para 25]
■ Moreover, 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
assessee has not exercised his options under the ESOP till date. It appears that 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 ESOP. It is imperative to point out that the
management proceeded by noting that there was no legal or contractual right under ESOP to provide
compensation for loss in current value or any potential losses on account of future accretion to the ESOP
holders. It was further noted that FPS, on its own discretion, has estimated and decided to pay USD 43.67
as compensation for each stock option as held on the record date. [Para 26]
■ Therefore, it is elementary to highlight that the payment in question was not linked to the employment or
business of the assessee, 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 assessee, 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. [Para 27]
■ Thus, the reasoning appended to the impugned order, holding that the amount in question tantamount to
perquisite under section 17(2)(vi), cannot be countenanced in law, as the stock options were not exercised
by the assessee and the amount in question was one-time voluntary payment made by FPS to all option
holders in lieu of disinvestment of PhonePe business. [Para 28]
CASE REVIEW

Godrej & Co. v. CIT 1959 SCC OnLine SC 101. [para 21] and Empire Jute Co. Ltd. v. CIT [1980] 3 Taxman
69/124 ITR 1 (SC) (para 24) followed.
National Petroleum Construction Co. v. CIT 2019 SCC OnLine Del 12353 (para 23) distinguished.
CASES REFERRED TO

Empire Jute Co. Ltd. v. CIT [1980] 3 Taxman 69/124 ITR 1 (SC) (para 10), Shrimant Padmaraje R.
Kadambande v. CIT [1992] 3 SCC 432 (para 10), Godrej & Co. v. CIT 1959 SCC OnLine SC 101 (para 10),
National Petroleum Construction Co. v. Dy. CIT 2019 SCC OnLine Del 12353 (para 11) and CIT v.
Saurashtra Cement Ltd. [2010] 192 Taxman 300/325 ITR 422 (SC) (para 19).
Tarun Gulati, Sr. Adv., Kishore Kumar, Ms. Ankita Prakash and Mahesh Singh, Advs. for the Petitioner.
Prashant Meharchandani, SSC, Akshat Singh, JSC, Ms. Ritika Vohra and Utkarsh Kandpal, Advs. for
the Respondent.
JUDGMENT

Purushaindra Kumar Kaurav, J. - The petitioner, vide the instant petition, seeks to assail the order dated
15.07.2023 passed under Section 197 of the Income Tax Act, 1961 ["Act"], whereby, the Revenue rejected the
petitioner's application seeking 'Nil' deduction at source certificate.
2. The brief facts relevant to appreciate the controversy at hand would reveal that the petitioner is an ex-
employee of the company namely Flipkart Internet Private Limited ["FIPL"] which is a wholly-owned
subsidiary of Flipkart Marketplace Private Limited ["FMPL"]. In addition thereto, the FMPL is the wholly-
owned subsidiary of Flipkart Pvt. Ltd., Singapore ["FPS"].
3. In 2012, the FPS rolled out an Employee Stock Option Plan ["ESOP"] called as Flipkart Stock Option Plan
["FSOP"], wherein, the FPS granted certain stock options to the eligible persons, including employees of its
subsidiaries. As per the clauses of FSOP, the petitioner was granted 1,27,552 stock options on and from
01.11.2014 to 31.11.2016 with a vesting schedule of 4 years.
4. On 23.12.2022, FPS announced the disinvestment of its wholly-owned subsidiary called PhonePe.
Thereafter, the value of the stock options of FPS fell pursuant to the disinvestment 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 the petitioner submitted that the Revenue
has misconstrued the onetime payment made on behalf of FPS as perquisite and characterized it as income
chargeable to tax under Section 17(2)(vi) of the Act. He argued that ESOPs merely constitute a right, not an
obligation to buy the underlying instrument and represent a right to subscribe to the shares of a company. He
contended that on vesting, the option holder had acquired an unfettered right to exercise the option and got
allotment of shares. He argued that ESOPs are taxable only in two contingencies-firstly, when the employee
exercises his option and secondly, when the shares are sold by an employee. He iterated that in the present
case, the stock options were merely held by the petitioner and the same had not been exercised till date.
10. Furthermore, he argued that the one-time voluntary payment made by FPS was not in relation to the
employment of the petitioner with FIPL and thus, cannot partake the character of salary which was liable to be
taxed under Section 15 of the Act. It is, therefore, submitted that since the payment made by FPS cannot be
construed as perquisite, the direction for deduction of TDS cannot be countenanced in law. In order to
substantiate his submissions, he placed reliance on the decisions of Empire Jute Co. Ltd. v. CIT [1980] 3
Taxman 69/124 ITR 1/ 4 SCC 25, Shrimant Padmaraje R. Kadambande v. CIT [1992] 3 SCC 432., Godrej &
Co. v. CIT 1959 SCC OnLine SC 101 and Empire Jute Co. Ltd.'s case (supra).
11. Per contra, Mr. Prashant Meherchandani, learned Senior Standing Counsel appearing on behalf of the
Revenue, vehemently opposed the submissions. He argued that the present writ petition has become
infructuous as the transaction already took place on 31.07.2023. He submitted that proceedings under Section
197 of the Act are not a fact-intensive exercise and rather, it is an administrative exercise and therefore, the
AO was not obligated to dive into the matter to determine whether the stock option was exercised with the
petitioner or not. He further argued that all the relevant facts pertaining to the FSOP were not produced before
the authority earlier. In order to substantiate his arguments, he placed reliance on the decision of this Court in
National Petroleum Construction Co. v. Dy. CIT 2019 SCC OnLine Del 12353 .
12. We have heard the learned counsels appearing on behalf of the parties and 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 the Act. The assessee has contended that this receipt is not taxable
but he has failed to quote any express provisions of the Income Tax Act under which this receipt
would be exempt from tax.
 1. The assessee has himself stated that M/s FPS intends to withhold full tax on the said payment,
which is why he has applied for issuance of a Nil TDS certificate. If the amount receivable by the
assessee is not an "income" and not taxable under the Income Tax Act, then why the payer intends to
withhold tax on the same. It implies that the payer is satisfied that the payment being made by it is
subject to withholding tax. Thus the assessee should have contended before the payer company that
this payment would not be subject to withholding tax but interestingly, the assessee has not
challenged the deduction of tax at source by the payer but instead he has chosen to request for
issuance of a Nil TDS certificate.
1. The assessee has not been able to satisfactorily prove that the amount receivable by him would be
exempt under any express provisions of the Act.
1. The assessee has stated that he would be reporting this income as exempt in his ITR. Since the
quantum of income sought to claimed as exempt is quite substantial, there is a high probability that
this ITR would selected for scrutiny assessment and if the claim of the assessee is not accepted by
the assessing officer, it may result in creation of tax demand. Hence issuance of a Nil TDS certificate
at this stage would be detrimental to the interest of revenue and recovery of taxes.
1. Section 17 (2) (vi) of the Act states that Perquisite includes
"...the 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 assessee.."
The phrase "directly or indirectly" used in the above clause implies that the amount receivable by the
assesse in the instant case would be covered under the purview of "Perquisite", which is included in
the salary as per section 17 (1) (iv) of the Act.
Compensation payable for the diminution of the intrinsic value of ESOPs held by an employee
including an ex-employee would be in the nature of income, and the same is not specifically exempt
under the Act.
The compensation is linked to the vested ESOPs in the instant case. ESOPs result in a taxable
perquisite on the allotment of shares 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 exemployee, 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 under an obligation to deduct tax while making
the payment of the compensation to the Assessee. The taxability under the other heads of income is
not relevant since the same is taxable under the head 'Salaries'.
In view of the above discussion, it is proposed that, if approved, the application of the Assessee for
issuance of a Nil TDS certificate may be rejected."
15. A bare perusal of the impugned order would reveal that the Revenue characterized the one-time payment
made by FPS to the petitioner under the head of a perquisite, as defined in Section 17(2)(vi) of the Act, on the
ground that the payment received was linked to ESOPs as a form of compensation for diminution of the fair
market value of stocks.
16. At the outset, it is relevant to point out that this Court vide order dated 23.08.2023 directed the petitioner
to file an affidavit apprising about the number of options held by him as on the record date. Pursuant to the
said order, the petitioner filed an affidavit stating that out of the total number of shares i.e., 1,27,552 allotted
to him, he holds 33,482 stock options as on the record date of 23.12.2022. The detailed calculation as
appended in the tabular chart is reproduced herein for reference:-
S Particulars No. of stock options/compensa tion
No.
i. Options granted 1,27,552
ii. Vested options (25% of the total options granted) [25% of (i)] =31,888
after 1 year i.e.01.11.2015
iii. Remaining 75% stock options to be vested in next [(i)-(ii)] =95,664 95,664/36=(2657/ month)
36 months
iv. Vested Options upto 31.10.2016 (2657x12 months) =31,884
v. Total vested options upto 31.10.2016 [(i)+(v)] =63,772
vi. Cancelled options on account of termination of [(i)-(v)] =63,780
employment on 31.10.2016
vii. Options repurchased by Walmart in the year 2017 [25% of (v)] =15943
(25% of the total vested stock options)
viii. Remaining vested stock options after repurchase [(v)-(vi)] =47,829
by walmart
ix. Options repurchased by Walmart in the year 2018 [30% of (viii)] =14,347
(30% of the total remaining vested stock options)
x. Balance as on record date [(viii)-(ix)] =33482
xi. Compensation [(x) x Compensation per stock options x USD
conversion rate] 33,482 x 43.67 x 82 =Rs.
11,98,97,033/-

17. As the facts of the matter suggest, undisputedly, the petitioner has not exercised his vested right with
respect to stock option under FSOP till date, which signifies that 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. "Salary", "perquisite" and "profits in lieu of salary" defined.—For the purposes of Sections 15 and 16
and of this section.—
***
(2) "Perquisite" includes—
***
[(vi) the 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 assessee.
Explanation.— For the purposes of this sub-clause,—

(a) "specified security" means the securities as defined in clause (h) of Section 2 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted
under any plan or scheme therefor, includes the securities offered under such plan or scheme;
(b) "sweat equity shares" means equity shares issued by a company to its employees or directors at a
discount or for consideration other than cash for providing know-how or making available rights in
the nature of intellectual property rights or value additions, by whatever name called;
 (c) the value of any specified security or sweat equity shares shall be the fair market value of the
specified security or sweat equity shares, as the case may be, on the date on which the option is
exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee
in respect of such security or shares;
(d) "fair market value" means the value determined in accordance with the method as may be
prescribed;
(e) "option" means a right but not an obligation granted to an employee to apply for the specified
security or sweat equity shares at a predetermined price"
19. At this juncture, it is imperative to point out that the determination as to whether a particular receipt would
tantamount to a capital receipt or revenue receipt is dependent upon the factual scenario of a particular case.
This position was also fructified in the decision of CIT v. Saurashtra Cement Ltd. [2010] 192 Taxman
300/325 ITR 422/ 11 SCC 84. The relevant paragraphs of the said decision are reproduced herein for
reference:-
"14. The question whether a particular receipt is capital or revenue has frequently engaged the attention
of the courts but it has not been possible to lay down any single criterion as decisive in the determination
of the question. Time and again, it has been reiterated that answer to the question must ultimately depend
on the facts of a 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 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 questions which,
though they may depend no doubt to a very great extent on the particular facts of each case, do
involve a conclusion of law to be drawn from those facts.' "
16. In Kettlewell Bullen and Co. Ltd. [AIR 1965 SC 65] dealing with the question whether compensation
received by an agent for premature determination of the contract of agency is a capital or a revenue
receipt, echoing the views expressed in Rai Bahadur Jairam Valji [AIR 1959 SC 291 : (1959) 35 ITR
148] and analysing numerous judgments on the point, this Court laid down the following broad principle,
which may be taken into account in reaching a decision on the issue: (Kettlewell Bullen and Co. Ltd. case
[AIR 1965 SC 65] , AIR p. 79, para 36)
"36. ... Where on a consideration of the circumstances, payment is made to compensate a person for
cancellation of a contract which does not affect the trading structure of his business, nor deprive him
of what in substance is his source of income, termination of the contract being a normal incident of
the business, and such cancellation leaves him free to carry on his trade (freed from the contract
terminated) the receipt is revenue: where by the cancellation of an agency the trading structure of the
assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the
assessee's income, the payment made to compensate for cancellation of the agency agreement is
normally a capital receipt."
20. As per the understanding of the Revenue, the said one-time voluntary payment at the discretion of the
management of FPS shall be pegged under the head of perquisite as per Section 17(2)(vi) of the Act. It is thus
pertinent to point out the observations made by the Supreme Court in the case of Shrimant Padmaraje R.
Kadambande (supra), wherein one-time voluntary cash allowance was given to the assessee and the Court
held that such monetary receipts, rather it was a capital receipt and thus, not liable to tax. The relevant
paragraphs of the said decision are reproduced as under:-
 "15. A case similar to the one on hand is H.H. Maharani Shri Vijaykuverba Saheb of Morvi [[1963] 49
ITR 594 (Bombay) ] wherein the High Court held that a voluntary payment without consideration cannot
fall in the category of income. The position here is exactly the same. There is no compulsion on the part
of the Government to give any allowance. It is purely discretionary. 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 qualified by statute unlike the present case which is purely a discretionary payment. It is no
use contending as also observed by the High Court that after the order is passed an enforceable right
arises. On the contrary the question would be whether the statute gives an enforceable right. We think, in
such of those cases falling under clause (d) of the proviso to Section 15(1) of the Act, no statutory right is
created. This is unlike those cases falling under clauses (i), (ii) and (iii) of sub-section (1) of Section 15.
These constitute different clauses as has already been pointed out by us. The fact that the assessee has
applied for a grant for maintenance, nor again, the periodicity of payment, would be conclusive as we
will demonstrate later.
***
35. There is no compulsion on the part of the Government to make the payment nor is the Government
obliged to make the payment since it is purely discretionary. A case similar to the one on hand is H.H.
Maharani Shri Vijaykuverba Saheb of Morvi [[1963] 49 ITR 594 (Bombay) ] head-note of which is
extracted:
"A voluntary payment which is made entirely without consideration and is not traceable to any source
which a practical man may regard as a real source of his income but depends entirely on the whim of the
donor cannot fall in the category of income.
The ruler of a native State abdicated in favour of his son in January, 1948. From April, 1949, onwards his
son paid him a monthly allowance. The allowance was not paid under any custom or usage. The
allowance could not be regarded as maintenance allowance, as the assessee possessed a large fortune.
Held, that as the payments were commenced long after the ruler had abdicated, they were not made under
a legal or contractual obligation. As the allowances were not also made under a custom or usage or as a
maintenance allowance, they were not assessable."
36. The position is exactly the same. The payment made by the Government is undoubtedly voluntary.
However, it has no origin in what might be called the real source of income. No doubt Section 15(1)
proviso clause (d) enables the applicant to seek payment but that is far from saying that it is a source.
Therefore, it cannot afford any foundation for such a source. Further, it is a compassionate payment, for
such length of period as the Government may, in its discretion, order.
***
39. As a result of the above discussion, 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 & Co.
(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 Ltd [(1956) SCR 223, 228] and in CIT v. Rai Bahadur Jairam Valji
[(1959) 35 ITR 148 : (1959) SCR Supp 110] had been held to be. Nor can this amount be said to have
been paid as compensation for the cancellation or cessation of the managing agency of the assessee firm,
for the managing agency continued and, therefore, the decision of the Judicial Committee of the Privy
Council in CIT v. Shaw Wallace and Co. [(1932) LR 59 IA 206] cannot be invoked. It is, however, urged
that for the purpose of rendering the sum paid as compensation to be regarded as a capital receipt, it is not
necessary that the entire managing agency should be acquired. If the amount was paid as the price for the
sterilisation of even a part of a capital asset which is the framework or entire structure of the assessee's
profit making apparatus, then the amount must also be regarded as a capital receipt, for, as said by Lord
Wrenbury in Glenboig Union Fireclay Co. Ltd. v. IRC [(1922) 12 TC 427] "what is true of the whole
must be equally true of part"— a principle which has been adopted by this Court in CIT v. Vazir Sultan
and Sons [Civil Appeal No. 346 of 1957, decided on March 20, 1959;(1959) 36 ITR 175] . The learned
Attorney-General, however, contends that this case is not governed by the decisions in Shaw Wallace's
case [(1932) LR 59 IA 206] or Vazir Sultan and Son case [Civil Appeal No. 346 of 1957, decided on
March 20, 1959;(1959) 36 ITR 175] because in the present case there was no acquisition of the entire
managing agency business or sterilisation of any part of the capital asset and the business structure or the
profitmaking apparatus, namely, the managing agency, remains unaffected. There is no destruction or
sterilisation of any part of the business structure. The amount in question was paid in consideration of the
assessee firm agreeing to continue to serve as the managing agent on a reduced remuneration and,
therefore, it bears the same character as that of remuneration and, therefore, a revenue receipt. We do not
accept this contention. If this argument were correct, then, on a parity of reasoning, our decision in Vazir
Sultan and Sons case [Civil Appeal No. 346 of 1957, decided on March 20, 1959;(1959) 36 ITR 175]
would have been different, for, there also the agency continued as before except that the territories were
reduced to their original extent. In that case also the 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 TC 605] . It is true that in the later English cases of Prendergast v.
Cameron [(1940) 23 TC 122] and Wales Tilley [(1943) 25 TC 136] the decision in Hunter v. Dewharst
[(1932) 16 TC 605] was distinguished as being of an exceptional and special nature but those later
decisions turned on the words used in Rule 1 of Schedule E. to the English Act. Further, they were cases
of continuation of personal service on reduced remuneration simpliciter and not of acquisition, wholly or
in part, of any managing agency viewed as a profit-making apparatus and consequently the effect of the
agreements in question under which the payment was made upon the profit making apparatus, did not
come under consideration at all. On a construction of the agreements it was held that the payments made
were simply remuneration paid in advance representing the difference between the higher rate of
remuneration and the reduced remuneration and as such a revenue receipt. The question of the character
of the payment made for compensation for the acquisition, wholly or in part, of any managing agency or
injury to or deterioration of the managing agency as a profit-making apparatus is covered by our
decisions hereinbefore referred to. In the light of those decisions the sum of Rs 7,50,000 was paid and
received not to make up the difference between the higher remuneration and the reduced remuneration
but was in reality paid and received as compensation for releasing the company from the onerous terms
as to remuneration as it was in terms expressed to be. In other words, so far as the managed company was
concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee
 firm for the rest of the term of the managing agency and, therefore, a capital expenditure and so far as the
assessee firm was concerned, it was received as compensation for the deterioration or injury to the
managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital
receipt within the decisions of this Court in the earlier cases referred to above."
22. It is also apposite to deal with the contention of the Revenue that the facts pertaining to the exercise of the
options held by the petitioner were not apprised to the AO in the proceedings referrable to Section 197 of the
Act. On the said aspect, it was contended that in such a scenario, only 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 the payment, therefore, the amount was liable to be taxed. It is pertinent
to note that the manner or nature of payment, as comprehensible by the deductor, would not determine the
taxability of such transaction. It is the quality of payment that determines its character and not the mode of
payment. Unless the charging Section of the Act elucidates any monetary receipt as chargeable to tax, the
Revenue cannot proceed to charge such receipt as revenue receipt and that too on the basis of the manner or
nature of payment, as comprehensible by the deductor. Such a position was also settled in the decision of the
Supreme Court in the case of Empire Jute Co. Ltd. (supra), wherein, it was held as under:-
"4. Now an expenditure incurred by an assessee can qualify for deduction under Section 10(2)(xv) only if
it is incurred wholly and exclusively for the purpose of his business, but even if it fulfils this requirement,
it is not enough; it must further be of revenue as distinguished from capital nature. Here in the present
case it was not contended on behalf of the Revenue that the sum of Rs 2,03,255 was not laid out wholly
and exclusively for the purpose of the assessee's business but the only argument was and this argument
found favour with the High Court, that it represented capital expenditure and was hence not deductible
under Section 10(2)(xv). The sole question which therefore arises for determination in the appeal is
whether the sum of Rs 2,03,255 paid by the assessee represented capital expenditure or revenue
expenditure. We shall have to examine this question on principle but before we do so, we must refer to
the decision of this Court in Maheshwari Devi Jute Mills case [AIR 1965 SC 1974 : (1965) 3 SCR 765 :
(1965) 57 ITR 36] since that is the decision which weighed heavily with the High Court, in fact,
compelled it to negative the claim of the assessee and hold the expenditure to be on capital account. That
was a converse case where the question was whether an amount received by the assessee for sale of loom
hours was in the nature of capital receipt or revenue receipt. The view taken by this Court was that it was
in the nature of capital receipt and hence not taxable. It was contended on behalf of the Revenue, relying
on this decision, that just as the amount realised for sale of loom hours was held to be capital receipt, so
also the amount paid for 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 factors."
 [Emphasis supplied]
25. Pertinently, as per Section 17(2)(vi) of the Act, the perquisites include value of any specified security
allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at
concessional rate to the petitioner. The most crucial ingredient of this inclusive definition is - determinable
value of any specified security received by the employee by way of transfer/allotment, directly or indirectly,
by the employer. As per Explanation (c) to Section 17(2)(vi) of the Act, the value of specified security could
only be calculated once the option is exercised. 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. Under the facts of the present case, 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.
26. Moreover, 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. It appears that 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. It was further
noted that FPS, on its own discretion, has estimated and decided to pay USD 43.67 as compensation for each
stock option as held on the record date. The relevant extract of the said communication dated 21.04.2023 is
reproduced herein for reference:-
"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 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 onetime voluntary payment not arising out of any statutory
or contractual obligation.
28. Thus, the reasoning appended to the impugned order, holding that the amount in question tantamount to
perquisite under Section 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.
29. Accordingly, we set aside the impugned order dated 15.07.2023. 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.
30. In view of the aforesaid, the writ petition is allowed in the above terms and disposed of, alongwith
pending applications, if any.
SANIYA
*In favour of assessee.