TaxTMI 
TaxTMI 
2024 (6) TMI 78
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.... 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, th....
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..... 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. 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 ....
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....er 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 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....
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....ent on 31.10.2016 [(i)-(v)] = 63,780 vii. Options repurchased by Walmart in the year 2017 (25% of the total vested stock options) [25% of (v)] = 15943 viii. Remaining vested stock options after repurchase by walmart [(v)-(vi)] = 47,829 ix. Options repurchased by Walmart in the year 2018 (30% of the total remaining vested stock options) [30% of (viii)] = 14,347 x. Balance as on record date [(viii)-(ix)] = 33482 xi. Compensation [(x) x Compensation per stock options x USD conversion rate] 33,482 x 43.67x 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 r....
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.... 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) 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 ofte....
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....e 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 (Bom)] 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 wh....
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....sed 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 decisio....
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....set and the business structure or the profit-making 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....
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....naged 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, ....
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....o 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 receip....
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....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,....