Voluntary payment to ESOP holders after disinvestment not taxable salary perquisite under Section 17(2)(vi)

Delhi HC ruled that a one-time voluntary payment made to ESOP holders following disinvestment did not constitute salary perquisite under Section 17(2)(vi) of the Income Tax Act. The court held that since the petitioner had not exercised stock options, no taxable income arose. The payment was voluntary compensation for diminished ESOP value due to business disinvestment, not linked to employment obligations. The court set aside the tax order and directed revenue authorities to consider the petitioner's TDS refund application based on these findings.

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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.

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